John Bennett: where next for European equities?

08/09/2017

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What has driven the European equities rally in 2017?
 
I think we have to modify our understanding of just how strong it has been. You have to modify it by the currency. If you had been a sterling investor in Europe, you have enjoyed it. Not just the last year, or 2017 to date; in fact the last five years have been fantastic for a sterling-based investor. Sterling has had a very meaningful devaluation that, as we speak, continues. If you had been a euro investor in Europe, returns year-to-date have been single digit.
 
What is really driving this? As ever there are a number of forces, but earnings is fundamental to this. The earnings trajectory has been good in certain sectors that were formerly not very good. Banks, for example. I have always been a bit confused that some investors feel they need to wait until the water is absolutely safe before they go back in. That’s not really a recipe for success when investing. You have to go in when there is an element of risk. I think that investors or asset allocators started to think, after the French election, that political risk in Europe had gone. All of the above created an environment where asset allocators came back to Europe.
 
Do you think it will continue?
 
I think Europe has further to run. I think Europe remains a catch-up trade. I would not join the camp of European equities fund managers who say that Europe is going to close the valuation gap completely with the US. But when I look at the valuation of US equities, and I look at the valuation of European equities, one of them is wrong. If US equities are right at current prices, then Europe has a lot further to go.
 
Will European banks remain a theme?
 
I think banks are going to continue as a theme, subject to one major proviso – the shape of the yield curve, which is worrying me as a bank investor and as a fund manager whose portfolio is tilted to value. I am very worried about the lack of inflation and the effects that has on bond yields. I think banks have further to go. Stock prices are at 12-month relative highs as we speak and they have done that despite no help from the bond yield curve. They have done it through earnings, through restructuring, through the much-needed building of capital. We have just come off the third consecutive good quarter for bank earnings. We are celebrating that because we had a nuclear winter for bank earnings, and for banks in general, that lasted a decade. We are coming out of that, so I don’t think that the positive mean reversion for bank earnings and bank stock prices is over in only a year.
 
What is exciting you as a stock picker?
 
I have over 30% in financials at present, which is largely banks, so I can’t really say that I’m not excited about a bank. I am the first to say ‘European banking – handle with care’, but I think that is in the past. If I were to pick one bank, I would say ABN Amro. Notwithstanding that we are likely to get Dutch government placing in the near future, I think that once that is past, it clears the way for further terrific performance from ABN Amro. I think the strength of the Dutch economy helps a lot. I think management’s focus on building capital is attractive. I think the valuation is attractive. So among the banks I think ABN Amro is really quite attractive in the short term.
 
Looking at non-banks, if you’re not in the market for instant gratification, I like Nokian Tyres, in Finland. I just met with management and we recently became shareholders. I don’t think it is necessarily going to perform in the rest of 2017. But I look at the return on capital in that business as a tyre manufacturer. Nokian used to make everything from televisions to wellington boots, but this is the tyres business, specialising in winter tyres, with a large part of its output coming from Russia. The company is building a new plant in America. If I look at the expected return on capital for when that plant is fully up and running, probably by 2020, I really like the profile. There is really something for everyone there.
 
Is Brexit affecting your thinking?
 
My view on Brexit and how it is affecting my thinking is exactly the same as it was in the lead up to Brexit (the vote). Ignore it. It has no impact whatsoever on my thinking.
 
 
Glossary:
 
Asset allocation/allocators: Asset allocation is a strategy where investors aim to balance risk and reward by allocating parts of their portfolio to different parts of the market, or across asset classes (eg. stocks, bonds, property, cash, in the US, UK, Europe, Japan or emerging markets). Asset allocators adjust their portfolio to reflect changing market conditions and their own objectives.
Earnings trajectory: The direction of earnings for a company or market, either up (indicating that earnings have been increasing) or down (falling).
Placing (placement): A placement is the sale of shares (or bonds) to a selected list of clients, such as companies or governments.
Return on capital (return on equity): The amount of income a company generates for shareholders, expressed as a percentage of the company’s shares in existence. It is a measure of a company’s profitability as it shows how much profit a company generates relative to the money that shareholders have invested.
Stock: A company’s stock is the body of shares, representing ownership, typically listed on a stock exchange.
Value (value investing): Value investors search for companies that they believe are undervalued by the market, and therefore expect their share price to increase over time.
Yield: The level of income that comes from an investment, typically expressed as a percentage rate.
Yield curve: A graph that plots the yields of similar quality bonds (loans) against their maturities. In a normal/upward sloping yield curve, the yields on bonds with a long time to maturity are higher than short-term bond yields. This reflects the greater risk over time that the loan may not be repayed. A yield curve can also signal market expectations about a country’s economic direction.
 

These are the views of the author at the time of publication and may differ from the views of other individuals/teams at Janus Henderson Investors. Any securities, funds, sectors and indices mentioned within this article do not constitute or form part of any offer or solicitation to buy or sell them.

Past performance is not a guide to future performance. The value of an investment and the income from it can fall as well as rise and you may not get back the amount originally invested.

The information in this article does not qualify as an investment recommendation.

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Janus Henderson Continental European Fund

This document is intended solely for the use of professionals and is not for general public distribution.

The Janus Henderson Fund (the ""Fund"") is a Luxembourg SICAV incorporated on 26 September 2000, managed by Henderson Management S.A. Any investment application will be made solely on the basis of the information contained in the Fund’s prospectus (including all relevant covering documents), which will contain investment restrictions. This document is intended as a summary only and potential investors must read the Fund’s prospectus and key investor information document before investing. A copy of the Fund’s prospectus and key investor information document can be obtained from Henderson Global Investors Limited in its capacity as Investment Manager and Distributor.

Janus Henderson Investors is the name under which investment products and services are provided by Janus Capital International Limited (reg no. 3594615), Henderson Global Investors Limited (reg. no. 906355), Henderson Investment Funds Limited (reg. no. 2678531), AlphaGen Capital Limited (reg. no. 962757), Henderson Equity Partners Limited (reg. no.2606646), (each registered in England and Wales at 201 Bishopsgate, London EC2M 3AE and regulated by the Financial Conduct Authority) and Henderson Management S.A. (reg no. B22848 at 2 Rue de Bitbourg, L-1273, Luxembourg and regulated by the Commission de Surveillance du Secteur Financier).

Nothing in this document is intended to or should be construed as advice. This document is not a recommendation to sell or purchase any investment. It does not form part of any contract for the sale or purchase of any investment.

Past performance is not a guide to future performance. The performance data does not take into account the commissions and costs incurred on the issue and redemption of units. The value of an investment and the income from it can fall as well as rise and you may not get back the amount originally invested. Tax assumptions and reliefs depend upon an investor’s particular circumstances and may change if those circumstances or the law change. If you invest through a third party provider you are advised to consult them directly as charges, performance and terms and conditions may differ materially.

The Fund is a recognised collective investment scheme for the purpose of promotion into the United Kingdom. Potential investors in the United Kingdom are advised that all, or most, of the protections afforded by the United Kingdom regulatory system will not apply to an investment in the Fund and that compensation will not be available under the United Kingdom Financial Services Compensation Scheme.

Copies of the Fund’s prospectus and key investor information document are available in English, French, German, and Italian. Articles of incorporation, annual and semi-annual reports are available in English. Key Investor document is also available in Spanish. All of these documents can be obtained free of cost from the Fund’s registered office in Luxembourg: 2 Rue de Bitbourg, L-1273 Luxembourg”, in Germany: Janus Henderson Investors, Tower 185, Friedrich-Ebert-Anlage 35-37, 60327 Frankfurt am Main, in Austria: Bank Austria Creditanstalt AG, Am Hof 2, 1010 Wien, in Spain: offices of the Spanish distributors, a list of which may be obtained at www.cnmv.es (Janus Henderson Fund is registered with the CNMV under number 259); in Belgium: Belgian Financial Service Provider CACEIS Belgium S.A., Avenue du Port 86 C b320, B-1000 Brussels; in Singapore: Janus Henderson Investors (Singapore) Limited, 138 Market Street #34-03/04 CapitaGreen, Singapore 048946; and in Switzerland from the Swiss representative: BNP Paribas Securities Services, Paris, succursale de Zurich, Selnaustrasse 16, CH-8002 Zurich who are also the Swiss Paying Agent.

Please note that Isle of Man investors will not be protected by statutory compensation arrangements in respect of the Janus Henderson Fund. We may record telephone calls for our mutual protection, to improve customer service and for regulatory record keeping purposes.

Information on this document is on Janus Henderson Investors’ best endeavours.

Specific risks

  • Shares can lose value rapidly, and typically involve higher risks than bonds or money market instruments. The value of your investment may fall as a result.
  • This fund is designed to be used only as one component in several in a diversified investment portfolio. Investors should consider carefully the proportion of their portfolio invested into this fund.
  • The Fund could lose money if a counterparty with which it trades becomes unwilling or unable to meet its obligations to the Fund.
  • If a Fund has a high exposure to a particular country or geographical region it carries a higher level of risk than a Fund which is more broadly diversified.
  • Changes in currency exchange rates may cause the value of your investment and any income from it to rise or fall.
  • If the Fund or a specific share class of the Fund seeks to reduce risks (such as exchange rate movements), the measures designed to do so may be ineffective, unavailable or detrimental.
  • Any security could become hard to value or to sell at a desired time and price, increasing the risk of investment losses.

Risk rating

Janus Henderson Pan European Fund

This document is intended solely for the use of professionals and is not for general public distribution.

The Janus Henderson Fund (the ""Fund"") is a Luxembourg SICAV incorporated on 26 September 2000, managed by Henderson Management S.A. Any investment application will be made solely on the basis of the information contained in the Fund’s prospectus (including all relevant covering documents), which will contain investment restrictions. This document is intended as a summary only and potential investors must read the Fund’s prospectus and key investor information document before investing. A copy of the Fund’s prospectus and key investor information document can be obtained from Henderson Global Investors Limited in its capacity as Investment Manager and Distributor.

Janus Henderson Investors is the name under which investment products and services are provided by Janus Capital International Limited (reg no. 3594615), Henderson Global Investors Limited (reg. no. 906355), Henderson Investment Funds Limited (reg. no. 2678531), AlphaGen Capital Limited (reg. no. 962757), Henderson Equity Partners Limited (reg. no.2606646), (each registered in England and Wales at 201 Bishopsgate, London EC2M 3AE and regulated by the Financial Conduct Authority) and Henderson Management S.A. (reg no. B22848 at 2 Rue de Bitbourg, L-1273, Luxembourg and regulated by the Commission de Surveillance du Secteur Financier).

Nothing in this document is intended to or should be construed as advice. This document is not a recommendation to sell or purchase any investment. It does not form part of any contract for the sale or purchase of any investment.

Past performance is not a guide to future performance. The performance data does not take into account the commissions and costs incurred on the issue and redemption of units. The value of an investment and the income from it can fall as well as rise and you may not get back the amount originally invested. Tax assumptions and reliefs depend upon an investor’s particular circumstances and may change if those circumstances or the law change. If you invest through a third party provider you are advised to consult them directly as charges, performance and terms and conditions may differ materially.

The Fund is a recognised collective investment scheme for the purpose of promotion into the United Kingdom. Potential investors in the United Kingdom are advised that all, or most, of the protections afforded by the United Kingdom regulatory system will not apply to an investment in the Fund and that compensation will not be available under the United Kingdom Financial Services Compensation Scheme.

Copies of the Fund’s prospectus and key investor information document are available in English, French, German, and Italian. Articles of incorporation, annual and semi-annual reports are available in English. Key Investor document is also available in Spanish. All of these documents can be obtained free of cost from the Fund’s registered office in Luxembourg: 2 Rue de Bitbourg, L-1273 Luxembourg”, in Germany: Janus Henderson Investors, Tower 185, Friedrich-Ebert-Anlage 35-37, 60327 Frankfurt am Main, in Austria: Bank Austria Creditanstalt AG, Am Hof 2, 1010 Wien, in Spain: offices of the Spanish distributors, a list of which may be obtained at www.cnmv.es (Janus Henderson Fund is registered with the CNMV under number 259); in Belgium: Belgian Financial Service Provider CACEIS Belgium S.A., Avenue du Port 86 C b320, B-1000 Brussels; in Singapore: Janus Henderson Investors (Singapore) Limited, 138 Market Street #34-03/04 CapitaGreen, Singapore 048946; and in Switzerland from the Swiss representative: BNP Paribas Securities Services, Paris, succursale de Zurich, Selnaustrasse 16, CH-8002 Zurich who are also the Swiss Paying Agent.

Please note that Isle of Man investors will not be protected by statutory compensation arrangements in respect of the Janus Henderson Fund. We may record telephone calls for our mutual protection, to improve customer service and for regulatory record keeping purposes.

Information on this document is on Janus Henderson Investors’ best endeavours.

Specific risks

  • Shares can lose value rapidly, and typically involve higher risks than bonds or money market instruments. The value of your investment may fall as a result.
  • This fund is designed to be used only as one component in several in a diversified investment portfolio. Investors should consider carefully the proportion of their portfolio invested into this fund.
  • The Fund could lose money if a counterparty with which it trades becomes unwilling or unable to meet its obligations to the Fund.
  • If a Fund has a high exposure to a particular country or geographical region it carries a higher level of risk than a Fund which is more broadly diversified.
  • Changes in currency exchange rates may cause the value of your investment and any income from it to rise or fall.
  • If the Fund or a specific share class of the Fund seeks to reduce risks (such as exchange rate movements), the measures designed to do so may be ineffective, unavailable or detrimental.
  • Any security could become hard to value or to sell at a desired time and price, increasing the risk of investment losses.

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